In last year ‘s Summer Budget, it was announced that the ISA tax protection would be extended to peer-peer lending schemes, with a new type of product ñ the Innovative Finance ISA (IFISA) ñ being launched in April.
Peer-peer lending company RateSetter has now set out the terms of its P2P ISA product, the first of its kind, allowing investors to earn solid interest rates on up to £15,240, without paying tax.
The new product will benefit from the same interest rates as existing P2P products from the lender, but the returns will be tax free.
Speaking to the Telegraph, RateSetter ‘s chief executive, Rhydian Lewis, said: “We already have a product, we ‘re just putting it in an ISA wrapper. I think banks sometimes think people will tolerate lower interest rates because it ‘s an ISA. We don ‘t want to do that.”
Using peer-peer schemes instead of conventional savings accounts differs as the money is not held by a bank but is rather offered to other individuals as loans. So, through RateSetter, someone wishing to put savings away can offer their cash at an interest rate that they choose, and then post it on the platform where it waits (without earning interest) until a borrower chooses it.
Investors can either set their own rate (as above) or choose the market rates which, for RateSetter will depend on the length of the investment and are as follows:
– 1 month ñ 2.8%
– 1 year ñ 3.8%
– 3 year ñ 4.3%
– 5 year ñ 5.7%
Peer-peer lending schemes have been growing in popularity lately, fuelled by a combination of disillusionment with banks, and the possibility of better interest rates.
Now that the tax-free ISA wrapper will soon be available to P2P investors, this popularity is likely to only increase. Once April hits, and the new IFISAs are released on the market, investors will be able to transfer any existing ISA balance they have into a new IFISA in addition to their £15,240 for the new year.
Those looking to open RateSetter ‘s P2P ISAs will not have protection under the Financial Services Compensation Scheme that those with traditional ISAs will, but will benefit from protection under the lenders provision fund. Note that not all peer-peer lenders have such protection in place.
Peer-peer lenders are also not currently fully regulated by the Financial Conduct Authority, but currently operate under interim authorisation. The expectation is that by April, they will have full authorisation, which will allow them to market products with ISA protection.
RateSetter ‘s Rhydian Lewis said of the new product: “we expect this to compete as much with the cash ISA as with the stocks and shares ISA. It sits neatly in the middle. If you want absolute certainty, go for a cash ISA. But if you are prepared to take on a little more risk for better returns, we think this is a good option.”
This goes with the general reasoning behind peer-peer schemes ñ the risk is higher than with conventional savings accounts, but so are the returns (for the most part). RateSetter ‘s provision fund does offer some insurance, though not quite to the same extent as the FSCS.